Good money management is critical to your success in the stock market, regardless of what system you are using. Good money management involves buying the correct number of stock shares/option contracts.
It involves diversifying your capital across a number of stocks in different industry groups, letting your winners run and, most importantly, keeping your losers small.
Poor money management is sizing positionsincorrectlyand putting too much money into one trade. It is also selling strong buy signals too quickly and siting on your losers "hoping" they will rally back upward.
No system is perfect on every trade because there are external factors beyond our control that can ruin a perfectly good buy signal (an industry group rotates out of favor, bad news comes out, etc). Michael Jordan missed some game-winning shots when he was active; Tiger Woods has made bogeys; you will not win on every trade.
Implemented correctly, the system outlined here will result in more winners than losers over time with the average winning play much bigger than the average losing play. But how do you deal with your losers will go a long way in determining howsuccessfulyou will be.Below is a summary of what constitute good and poor money management:
Good money management
Diversifying across a number of stocks in different industry groups Selling losers quickly:most big losers start off as small losers
Letting winners run:be patient and wait for sell signals - especially when the market is in a strong uptrend
Great system + good money management = consistent performance
Poor money management
Trying to hit a home run while putting most of your capital into one play Hanging on to your losers: thinking, "it will come back... and then I'llsellatbreak even."
Selling winners too quickly: you can never get huge returns of 100%+ if you are selling after a quick 10% or 20% move
Great system + poor money management = poor performance